The economist: How the tax jungle lowers tax morale

Germany's income tax is considered to be particularly complex.

A representative survey conducted by ZEW Mannheim and the University of Mannheim in 2018 showed that this triggers frustration among taxpayers. There, for example, an absolute majority was in favor of simplifying income tax.

The costs associated with the complexity of tax compliance are significant and include not only time and frustration costs, but often also direct costs for tax advisors or software.

However, one aspect has so far received little attention in the public debate: the influence of the complexity of tax rules on tax evasion.

According to the study by the ZEW and the University of Mannheim, around 50 percent of all respondents find their tax return complicated if they prepare it themselves.

This is where a new study by the ZEW Mannheim comes in and investigates whether the perception of a complex income tax system in Germany has an impact on individual tax morale.

For this purpose, the analysis used a survey experiment in the German Internet Panel, a representative population survey as part of the collaborative research center “The Political Economy of Reforms”, which is due to expire this year.

A warning sign

In this experiment, participants were randomly given information about the observation that many citizens are not sure whether they are actually reporting their income correctly due to complex tax rules.

Additional interviews with the author revealed that this perceived complexity is mainly due to the scope of the documentation requirements and the fear of having forgotten something important or given the wrong information.

The results of the experiment indicate that this news and the uncertainty it conveyed among the respective fellow citizens lead to a higher acceptance of tax evasion and thus to lower tax morale among the respondents.

Specifically, the respondents concerned are 4.5 percentage points less likely than the untreated control group to consider tax evasion to be somewhat unacceptable, unacceptable or absolutely unacceptable.

With 12.6 percentage points, the probability of considering tax evasion to be absolutely unacceptable decreases due to the provision of information.

The impression of general uncertainty as to how tax rules are to be interpreted creates uncertainty among otherwise honest and tax-honest citizens and thus moral leeway not to be one hundred percent honest when paying taxes.

The observation that similar, albeit somewhat smaller, effects were found in a follow-up survey two months after the experiment makes it clear that knowledge of social problems in tax compliance in the context of complex tax rules can also have a lasting effect on tax morale and does not fizzle out immediately.

Moral leeway

A recent study by researchers at the LMU Munich and the University of Laval, which examined the individual probability of tax compliance for tax forms of varying complexity, found similar results in a laboratory experiment.

Specifically, the subjects had to calculate their net income after performing a job, which they could calculate with either a simple or a more sophisticated explanation.

The portion that the subjects do not take home is either given to a moral institution (specifically the German bone marrow donation) or to an institution that is not to be considered moral (in this case the Bavarian Yacht Club in particular).

While the simple explanation fit on one page and required three data entries,

The results suggest, among other things, that complex tax rules create a moral leeway for the interpretation of these rules.

In particular, the tax has been calculated and paid correctly if the use of the “remaining” tax amounts is used for a good and moral purpose.

Only for morally dubious purposes, however, does the additional complexity in the control rules lead to evasion behavior in the experiment.

In this respect, there are particular problems with tax honesty if tax laws are not only viewed as complex, but also as unfair.

While, as always, caution must be exercised when transferring studies to the real world, these studies do offer a legitimate warning signal that more tax rules are not just needed to aliment – ​​however legitimate living circumstances and particular interests.

As shown, the size and clarity of the regulations themselves can also have consequences for tax honesty and thus for the tax revenue of the state.

Politicians should realize that the Income Tax Act is not just a general store of individual interests to be protected, but gains acceptance through transparency and comprehensibility.

Germany can at least agree that the tax jungle doesn't have to be there.

Sebastian Blesse

is a researcher at the ZEW - Leibniz Center for European Economic Research in Mannheim in the research area "Corporate Taxation and Public Finance".